1 MINERAL TAXATION IN ZAMBIA -MAIN CHALLENGES FOR THE ZAMBIA REVENUE AUTHORITY Berlin Msiska Commissioner General - Zambia Revenue Authority

2  INTRODUCTION  TWO PHASED TAX ADMINISTRATION REFORMS  MINING SECTOR CHALLENGES  RECENT POLICY CHANGES TO THE MINING TAX REGIME  ENHANCED ADMINISTRATIVE RESPONSES TO MINING SECTOR CHALLENGES  FUTURE OUTLOOK

 Zambia is a rich mining country.  Mining dates back to the early 20 th Centaury pioneered by the British South African company.  Until nationalisation of the mines between 1968 and 1972 the two dominating multi- national enterprises were Anglo America and Roan Antelope.  Prior to nationalisation mining was quite dominant: 30-50% of GDP, 30-50% of total tax revenues, above 90% of exports 3

 Nationalisation period ( ) was beset by low investment or re-investment and very low metal prices on the international market.  In 1991, the process of privatisation was initiated which saw the mines go back into private hands (mostly foreign multi-nationals)  Origins of current mine owners include: China, India, Australia and Canada. 4

 Along with wider economic reforms, Zambia embarked on two phases of tax administration reforms: 1.Prior to 1994 the Ministry of Finance had two separate departments that administered the country’s tax regime: Customs and Excise Department and the Income Taxes Department saw the creation of a semi autonomous corporate entity Zambia Revenue Authority through the merger of the Customs and Excise Division and the Direct Taxes Department. Alongside the creation of a division responsible for administering the newly introduced Value Added Tax. The Authority was a tax type focused administration Tax reforms placed emphasis on integrating and segmenting tax payers to create a taxpayer focused administration. 5

The outcome of the creation of ZRA and the Tax Policy changes in 1994 were as follows:  There was a marked increase in tax effort from about 13 Percent of GDP prior to 1992 to percent.  Simplified Personal Income Taxation Structure.  Tax Base was broadened and Tax System was simplified.  Successfully introduced VAT. 6

 Merger of VAT and Direct Taxes Divisions - Dec  Establishment of Design & Monitoring - Jan  Launch of service standards.  Design of policies & procedures.  Establishment of Large Taxpayer Office - Jan  Establishment of the specialized mining tax unit.  Medium and Small Taxpayers in the mining sector are administered under the Mining Unit.  Establishment of Small and Medium Taxpayer Office-April

 Improved revenue Performance.  More equitable distribution of tax burden across the country.  Reduced compliance cost for taxpayers.  Greater control over tax evasion and tax fraud.  Improved services to taxpayers.  Greater support from government and stakeholders. 8

 2012 Figure are Budget Figures  2011 Figures include Mining Tax Arrears of 1.87 of GDP

Possible under valuation of minerals that are not internationally traded such as gemstones.Possible under valuation of minerals that are not internationally traded such as gemstones. Possible under declaration of mineral content in mineral ores.Possible under declaration of mineral content in mineral ores. Possible non-disclosure of recoverable precious metals from mineral ores and concentrates.Possible non-disclosure of recoverable precious metals from mineral ores and concentrates. Mining versus contract mining – An increase in contract mining leading to companies trying to use the tax regime applicable to mining companies.Mining versus contract mining – An increase in contract mining leading to companies trying to use the tax regime applicable to mining companies. Transfer Pricing – setting prices, conditions and terms on transactions with related parties on cross border transactions in such a way that profits arise in a country determined by the multinational companies determines.Transfer Pricing – setting prices, conditions and terms on transactions with related parties on cross border transactions in such a way that profits arise in a country determined by the multinational companies determines. 10

Thin Capitalisation – Exploiting tax deductible interest flows.Thin Capitalisation – Exploiting tax deductible interest flows. Hedging Transactions – Structuring complex commodity hedging transactions in such way that losses are reported in a country determined by the multinational enterprises.Hedging Transactions – Structuring complex commodity hedging transactions in such way that losses are reported in a country determined by the multinational enterprises. Intragroup services - Pricing of management fees and technical services among others at non arms length basis and also whether these services have in fact been provided.Intragroup services - Pricing of management fees and technical services among others at non arms length basis and also whether these services have in fact been provided. 11

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The Mining Audit Unit was created in July 2008 to specifically administer and handle all domestic taxes of the mining sector. The unit: Is housed under the Large Taxpayer Office. Handles clients of all sizes (small, medium and large). Deals with companies involved in: - Mining - Mining services (large enterprises) - Mineral trading (small and large enterprises) - Prospecting and exploration 13

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The Revenue Authority has been using a number of methods aimed at addressing the challenges and risks posed by the Mining Sector : Legislation - The tax law has provisions for limiting transfer pricing and thin capitalization.Legislation - The tax law has provisions for limiting transfer pricing and thin capitalization. Capacity building of staff:Capacity building of staff: through training and workshops in specialized courses offered by CATA, ATAF, OECD among others. through training and workshops in specialized courses offered by CATA, ATAF, OECD among others. Cooperation with other tax jurisdictions aimed at strengthening specialized large taxpayer revenue administration. Cooperation with other tax jurisdictions aimed at strengthening specialized large taxpayer revenue administration. 15

Transfer Pricing Practice note for staff to refer to during the course of their work. Transfer Pricing Practice note for staff to refer to during the course of their work. Enhanced Integrated audits.Enhanced Integrated audits. Fostering enhanced relationships with taxpayers aimed at sensitizing them on various tax concerns.Fostering enhanced relationships with taxpayers aimed at sensitizing them on various tax concerns. Fostering linkages with key stakeholders such as the Ministry of Mines.Fostering linkages with key stakeholders such as the Ministry of Mines. Increased risk profiling of taxpayers.Increased risk profiling of taxpayers. 16

The Mining Audit Unit has since scored the following successes: Enhanced client relationships with corporate clients based on mutual trust and respect.Enhanced client relationships with corporate clients based on mutual trust and respect. Increased level of voluntary disclosures by taxpayers on tax underpayments.Increased level of voluntary disclosures by taxpayers on tax underpayments. Increased Mineral royalty registrations and payments.Increased Mineral royalty registrations and payments. 17

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 Tax revenue expected to increase ◦ Most of the companies have almost exhausted their capital allowances and therefore expected to start paying taxes  Copper production is also expected to increase due huge investments in the last few years 20

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